Is Your Home an Investment?

Posted on July 11, 2012July 11, 2012 by Danielle

(Photo credit: mharrsch)

Yup, that’s what we all believed for so many years. But the gyrations in the housing market, and the huge amount of “wealth” lost by so many of us, are making a lot of people question just exactly what home-buying is worth, as well as their own homes. I’d like to propose that we re-consider just what kind of investment a home actually is: IMHO, it’s actually more like a collectible—closer to a coin or doll or maybe even a wine collection. And a lot of people would be happier with their “investment” if they re-cast their thinking along those lines. How so?

Buy a collectible or house only if you’ve taken care of the basics. You shouldn’t be buying either one if you have huge credit card bills, no emergency fund, and no significant retirement savings (appropriate to your age). Otherwise, you really can’t afford either.

Realize you can’t easily convert to cash. Of course, a Jumeau doll, a bottle of Chateau Something, or a stucco four-square in Evanston can eventually be converted to cash. But you might have to wait for the right buyer, and selling costs for the auction premium or the broker’s commission can take a healthy bite out of the proceeds.

You have to be prepared to hold them for a long time to see a profit over purchasing costs, and ride out bad markets and changes in fashion. Beanie Babies, Cabbage Patch dolls and McMansions aren’t really the top of the value heap right now.

You can see the market take surprising dips. The stock-in-trade at Antiques Roadshow is the person gasping at how much their ugly vase or over-wrought china cabinet is worth compared to what they paid. Yes, it’s my favorite show too—everyone would like to pick up a piece of junk at a yard sale and make a cool $100K. In a recent show, they re-priced items that had originally appeared on the show in the 1990s. It was a shocker—many, many items had gone down in value significantly, and many more were static. Even a crummy but diversified portfolio did better than that. I probably don’t need to draw the parallels with the housing market. There’s no investment that can guarantee steady appreciation.

Neither a housing investment nor collectibles pay you any income. I’m excluding rental property here. You can sell either one to raise cash, but you may need to overcome some emotional attachment to something you love. When you retire, at least some of your wealth needs to be generating income. If most of your net worth is tied up in something that produces no income, well, I hope your Social Security is adequate for your needs. Rich on paper doesn’t necessarily mean rich income.

Significant ongoing costs continue throughout ownership. Both cost you insurance. For collectibles, you might need to maintain ideal storage conditions. For your house, there are property taxes, ongoing maintenance, periodic major repairs, and the seemingly endless bills from the phalanx of tradespeople who are my on-going “best friends”.

Part of the fun is continuous upgrading. No, no, no.

And the one good comparison I can think of…

Both collectibles and your home can provide significant enjoyment while you own them.

Normally I don’t advise on collectibles, but for them and for a house, people can have very good reasons to own them. Sinking part of your worth into either requires more thought and less “givens” than most of us considered prior to 2008. My suggested rules of thumb: the equity in your home should constitute no more than 1/3 of your total net worth, and an investment in collectibles no more than 5% (and that’s pretty generous), and only if you actively participate and understand whatever you’re buying. We can argue about those figures, but you’d probably agree that most of your friends have way more house than they can afford. Right?

Selling a House—What I learned

Posted on July 5, 2012July 5, 2012 by Danielle

I never thought it would happen. I finally sold my dad’s Listing Image house. Dad passed away in November of 2010, but the house was vacant for several months while he moved in and out of hospitalizations and I was just too busy even to think about it. I had to put it on hold until March since I was studying for my CFP® exam. Shortly thereafter I broke my foot, which took me all of last summer to recover from–no stairs and no carrying. Dear daughter and I spent September through December (while in the throes of college applications) clearing out 50 years’ worth of my parents’ possessions. By January, we were ready to go, but the contractors weren’t. The woes of dealing with contractors are fodder for another post, but let’s just say that the last one finished up two weeks ago. So here’s the first lesson I learned:

If you plan to sell your home quickly to cover care expenses, you will most certainly need Plan B. Really, look around your house—is it ready for a buyer? Or do you have tons of junk, sentimental ugly memorabilia you can’t get rid of, filing you’re planning to get to, and a yard long list of niggling home repairs you just haven’t gotten to? My hand’s up. Do you think you will be able to accomplish all of this when you need urgent and continuing care? Do you think your children or friends could clean it all up in the 2 or 3 months before Medicare kicks you off their payroll (if you’re lucky)? Why your home is not an investment will also be the subject of a future post, but right now, PLEASE do not consider your home your long-term care insurance. Buy real insurance.

Which brings me to another lesson, and a pretty intense scrutiny of my to-do list. Keep up with home repairs. My dad let them go over the years as he got older and less able to see. Many issues he never told me about, not wanting to bother me. In truth, I barely keep up with my own repair list, so he was probably right. But those things grow and multiply until either all the little problems end up taking a ton of time to get fixed, or a few little ones grown into really big ones. Sometimes it’s even hard to identify what type of repairperson can even fix the problem.

Similarly, update your decorating. Even good design doesn’t stay static. My house is all Prairie-style which I think is a classic, but the cats have worked over the couch and the whole place could use a repaint. If peach was in fashion in the 80s, and you had the whole place repainted then, it’s time for another look (sorry, Mom). Similarly, stuff like pillows and cushions can have an amazing impact on perceived worth and price.

Get some staging advice. I am interested in design, but I’m not a pro. My friend Nilda Carlo is. She is a feng shui expert with great design sense and I asked her for a staging plan, including paint colors. It was amazing. I used to thump this when I sold real estate many years ago, mostly because I listed too many houses that looked like crap and the owners couldn’t see it. I knew Dad’s house looked like crap but didn’t know what to do about it, besides cleaning and clearing. She did. (email or call me for her number).

It’s gonna cost you. I wrote more than $10,000 in repairs, paint, hardware, and spackling checks. And really, the house wasn’t in that bad shape to start.

Keep up with cleaning. Your kids/heirs will thank you. Hundreds of times.

Talk to several realtors. After selling real estate for 7 years, okay, I’m a little skeptical of realtors, but there’s been a huge industry shakeout so my guess is more of the strong survived. I talked to 3. One was the rather oily kind I remember who’s hoping to impress with charm and scare you into listing at a rock bottom price for (his) quick sale. I should have known about this particular guy as I find his photocopied flyers scattered all over my lawn. The second one was quite presentable, had sold a house quickly and recently, near a friend of mine, and came in with a $5,000 higher listing price. However, my very good friend had worked with another agent, equally presentable, and I went with her and her listing price which was $10,000 higher than door #2.

Normally I’m highly suspicious of the realtor who snags a listing by hooking the owner with a high price, but she had a convincing argument—the market is crazy enough that it’s worth testing. If I’m paraphrasing her correctly, there’s a lot on the market, but a lot is a) short sales or foreclosures that take FOREVER to complete or b) looks like crap (see above!). I thought it was gutsy. And, because I didn’t want to see that sign out there growing moss, I made a firm commitment to myself that if it didn’t generate at least one offer for every 10 showings, or wasn’t shown at least 10 times in two weeks, I’d drop the price.

It was a stampede.

The property was listed last Friday. By Monday evening it had been shown 19 times and I had three offers. As long as it passes inspection (which I expect), it’s sold. At $5,000 less than listing price, which makes me conclude that it was the right price and it is certainly worth it to test the market. On the other hand, not too much, judging from the apparently permanent installation of several other for sale signs in the neighborhood.

Side note to realtor #2—I sent you a nice note giving you honest and complimentary feedback, the kind of feedback I and most other service providers would be happy to have. A little thank-you-see-you-next-time might have actually engendered a referral or two in the future. Utter silence—not nice. And note to other realtors: don’t let your clients (or was it you) leave half eaten hamburgers in the basement of a vacant home. Also not nice.

I won’t say I was exactly ready to retire on the price I got for it. The appraisal I had right after Dad died was $32,000 higher than the sale price. Yes, the market has dropped, and maybe the appraiser was a tad optimistic, ya think? But, get an appraisal immediately if you inherit property. It wasn’t uppermost in my mind, but luckily my CPA was thinking more clearly than I was. It’s probably going to be a long time before I pay capital gains taxes again. (Personal residence losses are not deductible, but inherited property that you don’t reside in or other investment property losses may be. I’m not an accountant, so see one for tax advice).

Finally, selling this house confirmed my perennial investing advice—go with your best shot today. No matter what you do, you’re taking a risk and you can’t know the future of the investment from one hour to the next. Would I have made more money if I’d sold in 2010? Would it have sold at the 2010 price if I hadn’t bothered cleaning it up? Would it have sold at all? Could I have gotten more? Who knows? As we used to say in real estate, sell when you have a buyer. The real worth of any investment is what you can get today. With the real estate market, it’s hard to see what will drive any huge improvement. The baby boom is over, and that (and easy credit) is what drove the last boom. Maybe we’ve returned to sanity—and a house that’s just a place to live. I hope my new buyers will be as happy in the house as my parents were.

My take on another popular money guru

Posted on June 22, 2012June 22, 2012 by Danielle

: Confessional dans la cathédrale de Bourges (Photo credit: Wikipedia)

There’s a lot to like about Dave Ramsey’s program, but don’t drink the Kool-aid just yet. Recently a couple of clients have come to me after attending one of his programs. I’ve read several of his books before, but this time I took a good look at his website and promos. There are a few, er, issues there.

Ramsey is what I’d call a conservative Christian, and therefore a lot of churches sponsor his programs, or religious organizations use his group to present programs for employees. But, as generations of journalists have been told, “If your mother says she loves you, check it out”. Don’t believe financial advice just because someone is a friend, or a brother-in-law, or claims to be religious. All scoundrels prey upon trust.

I’m not saying Ramsey is a scoundrel. I think he gives excellent advice on budgeting, and has a nifty tool on his website that takes your income and instantly assigns amounts to his recommended spending categories. His recommendation of 10% to charitable donations may be a little high for some people, but hey, it’s a good goal.

I have nothing but admiration for his method of getting out of debt (the “debt snowball”) and recommend it when clients have that issue. He has lots of good info on his website about purchasing a car for cash, managing a budget, etc. Or get one of his books out of the library: there are a bunch and they basically all say the same thing.

Gosh, the guy even emphasizes the need to work with a professional planner, which I gotta love, right? Um, not so much. There’s a tab called “Dave recommends” and, well, these folks are just plain advertisers. Maybe Ramsey likes them, but they’re paying for the endorsement. And what about the financial planners (he calls them ELPs—endorsed local providers)? They’re salespeople. How do I know? Because the first requirement is that the “advisor” be regulated by FINRA. FINRA regulates the brokerage industry. Fee-only financial planners are regulated by the SEC or the State (depending on the size of assets managed). If you go to a financial “advisor’s” website site, scroll down the page to the tiniest print you (can’t) see. If it says “Securities offered through [blah-blah]. Member FINRA, SIPC” well, you’re about to be socked with commissions or some dumbo wrap account. You are NOT looking at the website of a fee-only financial planner.

How in good Christian conscience Ramsey can recommend “advisors” who are going to cost his stressed or frugal clients huge management fees, significant commissions, and nightmares transferring accounts when they finally wise up, is beyond me. Look for advice from people who have no financial interest in selling you some crap (check out bogleheads.org, for example), or who are paid by you and are legally obligated to work for you in your best interest (fee-only advisors).

Dave needs to go to confession.